Is Mandatory Audit Firm Rotation Necessary?

Abstract

This study investigates voluntary audit firm rotation in order to determine if mandatory audit firm rotation as proposed by the Public Company Accounting Oversight Board (PCAOB) is necessary or if voluntary audit firm rotation is an acceptable alterative. The study accomplishes this by examining the average audit firm tenure for companies included in the S&P 500 index. The first analysis examines the average audit firm tenure of companies included in the S&P 500 index at any time in the period from 1990 to 2014. Recognizing that companies may not remain in the S&P 500 index for very long, this sample could potentially bias the result. Therefore, the second analysis focuses on the average audit firm tenure for those companies listed in the S&P 500 in 2013 using data from 1974 to 2013. The second analysis finds that less than 50% of companies listed in the S&P 500 index voluntarily switch auditors within the suggested ten-year guidelines. Therefore, I conclude that the voluntary audit firm rotation naturally occurring in the markets is insufficient to allay the concerns of financial statement users and regulators and other measures should be considered in order to maintain audit firm's independence.